Thoughts on business school, economics, NC State, and everyday life from an economist at NC State's business school
Wednesday, August 8, 2012
How big is the multiplier?
Cal-San Diego economist and blogger James Hamilton summarizes the research of his colleague Valerie Ramey on how much government spending affects GDP. The results, based on almost 75 years of data, show that a one percent increase in government spending per capita results in a 0.7 percent decrease in private spending per capita. So GDP goes up, but not by nearly as much as simple textbook models imply; the multiplier (ratio of change in GDP to change in government spending) appears to be much less than one. This certainly would explain why the economy failed to respond to the stimulus packages of Bush 43 and Obama.
Steve Allen is Associate Dean for Graduate Programs and Research in the College of Management at NC State University. He has appointments in the Department of Economics as well as the Department of Management, Innovation, and Entrepreneurship. Steve also is a Research Associate of the National Bureau of Economic Research, a non-profit research organization located in Cambridge, Mass.